GST Explained - Learning Centre
📖 What is GST?
Goods and Services Tax (GST) is a consumption tax applied to most goods and services sold or consumed in New Zealand. At 15%, GST is included in the price of nearly everything you buy, making it one of the most significant taxes in the New Zealand economy.
History of GST in New Zealand
GST was introduced in New Zealand on 1 October 1986 by the Fourth Labour Government as part of comprehensive economic reforms. It replaced the old wholesale sales tax system with a broader, more efficient consumption tax.
- 1986: GST introduced at 10%
- 1989: Increased to 12.5%
- 2010: Increased to 15% (current rate)
Why Does GST Exist?
GST serves several important purposes in New Zealand's tax system:
- Revenue generation: GST accounts for approximately 30% of New Zealand's total tax revenue, making it the second-largest source of government income after income tax
- Economic efficiency: As a broad-based consumption tax, GST is economically neutral and doesn't distort business decisions
- Simplicity: One rate applied to most goods and services makes compliance relatively straightforward
- Fairness: Everyone pays GST regardless of income, and tourists contribute through their purchases
Unlike income tax which is paid by individuals, GST is collected by businesses at each stage of the supply chain. Businesses charge GST on their sales (output tax) and claim back GST on their purchases (input tax), remitting only the difference to Inland Revenue.
Who Needs to Register for GST?
GST registration is mandatory if:
- Your business has a turnover of more than $60,000 per year (this is your gross income before expenses)
- You expect your turnover to exceed $60,000 in the next 12 months
You can also register voluntarily if your turnover is below $60,000. Many businesses do this to:
- Claim back GST on business expenses
- Appear more established to clients and suppliers
- Prepare for future growth above the threshold
Once your turnover exceeds $60,000, you must register for GST within 21 days. Operating above this threshold without registration can result in penalties from IRD.
What's Subject to GST?
Standard-Rated Supplies (15% GST)
Most goods and services in New Zealand are subject to the standard 15% GST rate, including:
- Retail goods and products
- Professional services (accounting, legal, consulting)
- Construction and building services
- Hospitality (restaurants, accommodation)
- Entertainment and recreation
- Digital services and software
Zero-Rated Supplies (0% GST)
Some supplies are zero-rated, meaning GST applies at 0%. This is different from exempt supplies:
- Exports: Goods and services exported out of New Zealand
- International transportation: Flights and shipping to overseas destinations
- Donated goods: Supplied by certain charities
The difference is crucial: If you make zero-rated supplies, you can still claim input tax (GST on your expenses). If you make exempt supplies, you cannot claim input tax.
Exempt Supplies (No GST)
A very small number of supplies are exempt from GST:
- Financial services (although fees may be subject to GST)
- Donated goods sold by some non-profit organisations
- Renting residential properties (but selling property has GST)
GST and Your Business
As a GST-registered business, you have several responsibilities:
- Charge GST: Add 15% to your prices (or include it in the advertised price)
- Issue tax invoices: Provide compliant invoices showing GST separately
- File GST returns: Submit returns and pay GST to IRD regularly
- Keep records: Maintain documentation for seven years
- Claim input tax: Reclaim GST paid on business expenses
💰 How to Calculate GST
Understanding GST calculations is essential for pricing, invoicing, and filing returns. There are two main calculations you'll perform regularly: adding GST and removing GST.
Adding GST (GST-Exclusive to GST-Inclusive)
When you need to add GST to a price (converting from GST-exclusive to GST-inclusive), you multiply by 1.15 or add 15%:
Example: Adding GST
Or using the quick method:
Removing GST (GST-Inclusive to GST-Exclusive)
When you need to determine how much GST is included in a total price, you divide by 1.15 or use the fraction method:
Example: Removing GST
Or using the fraction method to find GST directly:
This fraction comes from the mathematics of GST: If the base is 100, GST at 15% makes the total 115. The GST portion (15) divided by the total (115) = 15/115 = 3/23. This gives you the GST component of any GST-inclusive amount.
Common Pricing Scenarios
| Scenario | GST-Exclusive | GST Amount | GST-Inclusive |
|---|---|---|---|
| Small service | $100 | $15 | $115 |
| Medium project | $5,000 | $750 | $5,750 |
| Large contract | $50,000 | $7,500 | $57,500 |
| Major project | $200,000 | $30,000 | $230,000 |
GST Returns: What You Pay to IRD
Your GST return calculates the difference between GST you've collected (output tax) and GST you've paid (input tax):
Example: Monthly GST Return
When You Get a GST Refund
If your input tax (GST on purchases) exceeds your output tax (GST on sales), you'll receive a refund from IRD. This commonly happens when:
- Starting a new business with high setup costs
- Making large capital purchases (equipment, vehicles)
- Exporting goods or services (zero-rated sales)
- Experiencing a slow sales period
IRD can audit your GST returns. Keep all tax invoices, receipts, and records for at least seven years. Incorrect GST claims can result in penalties, interest charges, and potential prosecution for serious cases.
📊 GST Returns and Filing
Once registered for GST, you must file returns regularly with Inland Revenue. Understanding the filing process, deadlines, and requirements is essential for staying compliant.
GST Filing Frequencies
You can choose how often you file GST returns based on your business needs:
1. Monthly GST Returns
- Best for: Larger businesses with consistent cashflow
- Deadline: 28th of the month following the taxable period
- Advantage: Faster GST refunds if you're owed money
- Consideration: More administrative work (12 returns per year)
2. Two-Monthly GST Returns
- Best for: Most small to medium businesses (default for new registrations)
- Deadline: 28th of the month following the taxable period
- Advantage: Balance between cashflow and administration
- Consideration: Six returns per year
3. Six-Monthly GST Returns
- Best for: Small businesses with annual turnover under $500,000
- Deadline: 28th of the month following the taxable period
- Advantage: Least administrative burden (2 returns per year)
- Consideration: Longer wait for refunds; may need to hold GST money longer
You can change your filing frequency by notifying IRD. Changes typically take effect from the start of your next taxable period. Choose a frequency that suits your cashflow and administrative capacity.
What's Required on a Tax Invoice?
When you're GST-registered, you must issue tax invoices for supplies over $50. A compliant tax invoice must include:
- The words "Tax Invoice" clearly displayed
- Your business name and GST number
- Date of the invoice
- Description of goods or services supplied
- Total amount charged (GST-inclusive)
- GST amount (either shown separately or with a statement like "Total includes GST of $X")
You cannot claim input tax on expenses without a valid tax invoice. Even if you've paid GST on a purchase, IRD won't allow the claim without proper documentation. Always request tax invoices from suppliers.
Accounting Methods for GST
Invoice Basis (Most Common)
GST is accounted for when you issue an invoice (for sales) or receive an invoice (for purchases), regardless of when money changes hands.
- Advantages: Matches standard accounting practices; simpler for most businesses
- Considerations: You may owe GST before receiving payment
Payments Basis
GST is accounted for when money is actually received or paid. Available for businesses with turnover under $2 million.
- Advantages: Better for cashflow; only pay GST when you receive money
- Considerations: More complex record-keeping; must track actual payments
Hybrid Basis
A combination where you account for sales on invoice basis but purchases on payments basis.
Input Tax Credits: What You Can Claim
As a GST-registered business, you can claim back GST on most business expenses. Here's what qualifies:
✅ Claimable Input Tax
- Stock and raw materials for resale
- Business equipment and tools
- Office supplies and stationery
- Professional services (accounting, legal, consulting)
- Rent for business premises
- Vehicle expenses (if used for business)
- Marketing and advertising
- Business travel and accommodation
- Software and online services
- Utilities for business premises
❌ Non-Claimable Input Tax
- Private or personal expenses
- Entertainment (meals, event tickets) - 50% limitation in some cases
- Items without a valid tax invoice
- Purchases before GST registration date
- Exempt supplies
Common GST Mistakes to Avoid
- Missing the registration threshold: Operating over $60,000 without registering
- Late filing: Missing the 28th deadline incurs penalties
- Incorrect calculations: Using wrong formulas or rounding errors
- Claiming without invoices: Always get proper tax invoices
- Personal expenses: Claiming GST on non-business purchases
- Poor record-keeping: Not keeping documents for seven years
- Mixing GST in accounts: Not separating GST from business income
🔢 Real-World Examples
Let's explore practical scenarios showing how GST works for different types of businesses in New Zealand.
Situation: Andrew runs a small building business, providing labour services. In January, he worked on four different projects at various hourly rates. He needs to calculate his GST obligations for his monthly return.
January Work Summary:
- Week 1: 50 hours @ $70/hour + GST
- Week 2: 40 hours @ $85/hour + GST
- Week 3: 45 hours @ $75/hour + GST
- Week 4: 25 hours @ $70/hour + GST
Calculating GST Collected:
Total invoiced (inc GST): $13,828.75
Business Expenses (January):
GST Return Calculation:
Situation: Susan runs a freelance graphic design business from home. She files GST returns two-monthly. During the March-April period, she had several projects and various business expenses.
Projects Completed (March-April):
Business Expenses (March-April):
Two-Monthly GST Return:
Susan uses 20% of her home exclusively for business. She can claim 20% of rent/mortgage interest, power, and internet costs. She keeps a logbook showing her office space measurements and usage.
Situation: John owns a medium-sized construction company. In April, he completed four projects involving both labour and materials. He files monthly GST returns.
Project Revenue (April):
Business Expenses (April):
Monthly GST Return:
Situation: Tim is a commercial fisherman in Paihia selling to local restaurants. In December, he made several large sales but didn't receive payment that month. He still incurred business expenses and needs to file his GST return.
Sales Made (December):
Business Expenses Paid (December):
GST Return Calculation:
Tim uses invoice basis accounting. He must pay $25,350 GST even though he hasn't been paid by customers. If he used payments basis accounting (available for turnover under $2m), he would owe $0 GST collected and could claim a $3,900 refund. However, he'd need to account for the GST when customers eventually pay.
Situation: Maria owns a busy cafe in Wellington. She files GST returns monthly and deals with daily cash and EFTPOS sales. May was a typical trading month.
May Sales:
May Purchases:
Monthly GST Return:
Maria's prices already include GST (as required for retail). She uses her EFTPOS terminal's daily reports to track sales accurately. She can't claim GST on food she or her family consume from the cafe - that's private use, not a business expense.
🎯 Test Your Knowledge
Complete this 10-question quiz to assess your understanding of GST
Situations like yours. The 5 situations worked through above sit alongside 21 more about understanding your pay and tax, each with the sums shown.